Taxes When Selling a Business: What to Set Up Years Before a Sale

Many ways to defer or reduce the tax on a sale only work if they're set up years before a buyer is involved. Ask your CPA and attorney early.

Not tax or legal advice. This article is general information based on my own experience selling a business. Every business and deal is different. Talk with your own CPA, attorney and financial advisor before acting on anything here.

The short answer

For many tax strategies, it's too late once a buyer is at the table. Some sellers defer or reduce income tax on a sale with installment sales or certain charitable trusts, and reduce future estate and gift taxes by gifting shares or using trusts before the value rises. Most of these need to be set up well before a deal. Deal structure, such as a stock sale versus an asset sale, also changes the tax. Ask your CPA and estate attorney about it years ahead, not after an offer arrives.

I learned about these after closing

After I sold my company, I started learning how other sellers had planned. By the time I heard about most of these options, it was too late to matter.

Strategies that need runway

Trusts. Some trusts move future growth out of your estate, and certain charitable trusts can defer income tax on a sale. They generally need to be in place before a sale is underway; transfers made once a deal is effectively locked in can be disregarded by the IRS.
Gifting shares early. Giving shares to family before the value jumps can use less of your lifetime gift and estate tax exemption. It doesn't avoid tax on the sale itself: family members generally keep your original tax basis, so the gain is still taxed when the shares are sold. This usually requires a formal valuation (see formal valuation vs. a range).
Installment sales. Being paid over time can spread part of the tax over the years you're paid, with the tradeoff that you're relying on the buyer to keep paying. Some of the gain, such as depreciation recapture, is still taxed in the year of the sale, and very large installment notes can carry an extra IRS interest charge.

QSBS: powerful, but narrow

Qualified small business stock (QSBS) can make a large part of the gain on a stock sale free of federal tax, though some states, such as California, don't follow it. For stock issued after July 4, 2025, the cap is generally the greater of $15 million or ten times your basis in the stock, with the full benefit after five years and partial benefits after three or four; older stock has a $10 million cap and needs five years. It applies only to qualifying C corporations under a size limit, generally only to value created after the stock is issued, and many businesses, including consulting and other professional services, don't qualify. Mine didn't. If yours might, it takes years of planning.

Deal structure changes the bill

Selling the stock of your company is taxed differently than selling its assets, and buyers often prefer an asset sale. Two things helped me, and I didn't know about either until they were in front of me:

An F reorganization. The buyer drove this restructuring, which is common when the business is an S corporation. It lets the buyer keep the company's contracts and tax ID, and for tax purposes the sale is generally treated like an asset sale. How that affects your taxes depends on your deal. I had never heard of it, and in my deal it worked in my favor.
A cost segregation study on our real estate. It sped up depreciation and, in our situation, helped reduce taxes in the year of the sale. It doesn't help everyone: if the real estate itself is sold, faster depreciation can be taxed back through depreciation recapture. Ask your CPA whether it fits your situation.

Don't wait for your advisors to bring it up

Your CPA and attorney are busy, and they may not know you're thinking about selling. You can't ask about something you don't know exists. The good ones can do a lot with a few years of runway, and very little once you're in the middle of a deal.

One thing to try this week

Book one meeting with your CPA and estate attorney, together if you can, and ask: if I sold in three years, what should we set up now?

What will the tax bill be when you sell, and when is it too late to change it?